Is a German ‘Fourth Reich’ emerging?

BERLIN, Germany — It may have been a bad idea to send a German. And his name certainly didn’t help matters.

When Horst Reichenbach arrived in Athens recently to head a new European Union task force to help the country deal with its debt, the Greek media instantly dubbed him “Third Reichenbach.”

Cartoons appeared of him in Nazi uniform. A Greek tabloid showed a photo of his office with the headline: “The new Gestapo headquarters.”

The Greeks are not alone in harboring suspicions toward Germany, which occupied the country during World War II. The British conservative press is up in arms. The Daily Mail went so far as to accuse the Germans of attempting to use the euro crisis to “conquer Europe” and establish a “Fourth Reich.” Meanwhile in Poland, Germany’s supposed imperial ambitions became an issue in the recent elections.

And as the euro crisis has deepened, German Chancellor Angela Merkel has pushed for the EU to have a greater say in the domestic governance of the euro zone’s seventeen members. Among other measures, she has called for real European power over countries’ budgets.

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With Italy now getting sucked into the debt spiral, Merkel has warned that deep structural reforms were needed quickly. “That will mean more Europe, not less Europe," she has said repeatedly, most recently on Monday at a meeting of her conservative Christian Democratic party. Likewise, party members reportedly want more power for Germany in the European Central Bank, by changing its voting system so that it is based on economic strength. Currently, each member country has one vote.

Here’s the rub: when the German leader calls for greater European power and influence, pretty much everyone interprets that to mean German power and influence. As the richest and most populous country in the union, Germany’s influence vastly overshadows that of the Brussels-based eurocrats.

Indeed, when people have a beef about the EU, they no longer complain about Brussels. They complain about Berlin.

It wasn’t supposed to be like this. On the contrary, after World War II, a major impetus for creating the European Union was that it would curb German power. Countries that had waged war against each other twice would tie their economies so closely together that future conflict would be impossible.

A similar calculation helped fuel the rise of the euro zone. As the price for accepting German reunification, the French president at the time, Francois Mitterrand, demanded that Germany give up its precious deutschmark and commit to a common currency. The goal was to buffer German power, not to bolster it.

Reluctant hegemony

In practice, while the member states big and small always had a supposedly equal say, the heart of the union has long been the Franco-German relationship. From the outset, Germany was to provide the economic firepower, and France the political leadership. That was how the Germans like it.

“Germans tended to lead from behind, and allow the French symbolically to occupy a major role,” said William Paterson, professor of German politics at Aston University in the UK. Now, however, the French economy appears increasingly shaky, with its banks deeply exposed to the debt of weak peripheral countries. Paris is desperately attempting to hold on to its coveted triple-A credit rating. The traditional relationship has tilted power toward Germany.

For all the talk of “Merkozy,” it’s increasingly clear that the German chancellor is in the driver’s seat.

“Germany does everything it can to portray an image of evenness, and a balanced relationship” with France, said Olaf Cramme, director of the Policy Network think-tank based in London. However “the relationship has become extremely one-sided, and Germany is calling the shots,” policymakers in France have told him, he said.

Berlin seems not to be completely comfortable with this role. Germany is a “reluctant hegemon,” said Paterson. Debtor countries “look to Germany to get them out of the mess,” he said. “This puts the Germans in the unenviable position of: if not Germany, who?”

Exacerbating the tensions, Germans grumble about the costs of the euro zone. Their politicians in turn appear patronizing toward the countries in trouble, lecturing them about fiscal responsibility.

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This, of course, ignores the many benefits that Germany has derived not only from the common currency, but also from its neighbors’ profligacy. The euro zone has provided Germany with a massive market into which it can sell its products easily and cheaply. And heavy borrowing by other members drove greater demand for its exports, making up for Germany’s relatively weak domestic consumption growth. In other words, without the euro zone, Germany’s economy would not have performed nearly as well.

“The counterpart to Germany living within its means is that others are living beyond their means;” said Philip Whyte, senior research fellow at the London-based Centre for European Reform. “So if Germany is worried about the fact that other countries are sinking further into debt, it should be worried about the size of its trade surpluses, but it isn’t.”

The view from Germany

Only a few years ago, as economies elsewhere on the continent boomed, Germany was regarded as the sick man of Europe. It was still bearing the huge costs of reunification with East Germany. Unemployment was stubbornly high. A decade ago, it endured a tough restructuring of its economy, including unpopular labor and welfare reforms.

“Germany did what Greece and Italy and France will now need to do,” said Ulrike Guerot, head of the Berlin office of the European Council on Foreign Relations. “We did this 10 years ago and we are now seeing the fruits of what we did.”

On a macro level, the belt-tightening appears to be yielding results. The economy is showing relatively strong growth. Unemployment has fallen to the lowest level since reunification, and exports have soared.

Germany’s recent struggles mean that its electorate sees matters quite differently from the rest of Europe. Just as they have stepped out of the mire, Germans see the euro zone’s profligate countries dragging them back in.

Another key fact is that while other countries regard Germany as an economic colossus with the means (if not the will) to help, the reality for its workers is at odds with this image. While wages increased significantly in many other countries over the past decade, in Germany they have remained stagnant for years. A report released by the Berlin-based German Institute for Economic Research last week showed that when adjusted for inflation, wages actually declined by 4.2 percent over the past decade.

In part, this is due to the mushrooming of low-paid, precarious jobs, a result of the labor law liberalization that helped boost growth. Yet even in highly unionized jobs, wages have not risen significantly.

“There has been a large shift of income from labor to capital,” said Whyte, at the Centre for European Reform. “In other words, German firms are now sitting on large piles of cash, but German workers have not been getting pay rises.”

Selling the bailout to Germans

The plight of the German worker makes the bailouts a harder sell. The advantages of a strong euro zone aren’t clear to the many people who have not gained financially from the country’s increasing wealth.

“Many Germans basically have not seen the fruits of the euro and benefits of the single market in the first place, and now they feel like they are going to pay for the all others,” said Guerot, from the European Council on Foreign Relations. “It’s very hard to make the argument among Germans that they should put billions on the table for Italy or Greece to save the single market.”

Opinion polls support this theory. The majority of Germans are not happy about the bailouts. After all, when they joined the euro zone, they had been assured that they would never be liable for other members’ debts. The electorate has already shown its wrath, punishing the governing parties in a string of regional elections this year.

A recent poll, carried out by Infratest Dimap for the public broadcaster ARD, showed that while support for Merkel’s current handling of the euro crisis is now growing slightly, 82 percent of Germans fear the worst is yet to come, while 84 percent said they feared Germany would end up having to pay even more for the bailouts. And with no final resolution of the debt crisis in sight, they may be right to be worried.

This increases the pressure on Merkel to attach as many strings as possible to the bailouts. “If they are going to have to pay, then they want to have a say,” said Paterson, the professor at Aston University. “They want the conditions to be the ones that they would favor.”

Given that Germans have endured cuts and liberalizations to make their economy strong, it makes sense to them that others should do the same. Yet unlike Germany, which could count on the booming euro zone to drive growth at a time when budgets were being slashed, Italy, Greece and other indebted countries don’t have any such engine of growth to latch onto.

The wrong medicine

“The policies which it has been imposing on other countries are flawed policies,” said Whyte. “Germany wants to turn the euro zone into a larger version of itself. That is essentially going to push the block as a whole into a depression.”

This in turn could lead to growing hostility towards Germany, he said. “If you’re swallowing what is perceived to be German medicine, and that medicine is essentially forcing economies to contract by 20 percent, with sharp increases in unemployment — and on top of that the Germans are saying, well, you clearly haven’t gone far enough and you need to do even more — then it’s inevitable that anti-German feeling is going to increase.”

Teemu Lehtinen, a Finnish public-policy adviser living in Athens, said, “It currently seems like the EU is being run by a group of large states, and the head of those is Germany.” This does not go down well at home with ordinary Greek citizens, he said, and makes them feel that the decision-making power is taken away from them and their elected politicians.

“It’s not that the Greeks trust their government or their parliament that much,” he added. “But it leads to the question: Who is in charge of our future? And more and more it seems that the Greeks think their future is in the hands of Mrs. Merkel.”